How to Reduce Rental Vacancy Rates in a Saturated Market
One of the biggest challenges to maintaining a profitable rental property is vacancy. Even when your rental goes vacant–and you’re not receiving rental income–you’re still paying insurance, taxes, utilities, and making mortgage payments. Just a couple extended vacancies a year can make a rental property unprofitable.
Many landlords–and property management companies–have just come to accept vacancies as a natural part of owning and managing rental property. In fact, I once had a property management company explain to me that every time a tenant moved out of one of my units I could expect a 2 to 4 week vacancy while they searched for a new tenant. That’s unfortunate, because with just little strategy you can avoid–even eliminate–vacancies in even saturated rental markets. This is how.
1. Time your leases.
Almost every rental market is cyclical to some degree. This means that during certain times of the year the rental market is stronger–and in others it’s softer. In colder climates, the rental market may be strongest during spring and summer. In college towns, the rental market is often strongest a month or two before school starts. In other areas, the rental market may remain pretty steady year round. The first step to decreasing your vacancy rate is understanding the cyclical nature of your market and timing your leases according.
If your property is located in a rental market where demand remains pretty steady year-round, then a year long lease that automatically renews month to month following the initial lease term is doable. However, if you own rental property in a market that is highly cyclical, you want to time your leases to renew while rental demand is strongest. For example, I own a rental property that is located in a college town. I only offer year-long leases and I renew leases every August right before school starts. If I don’t do this, I inevitably will experience vacancies.
I own another property located in a colder climate. People don’t have any problems moving out of a rental and migrating to a warmer climate during winter, but very few people are moving to colder climates and looking for rentals during the dead of winter. For this rental, I offer 6 month to year-long leases that I renew between April and August of each year. I don’t offer any leases that expire between September and March.
Prior to implementing a timed leasing strategy I regularly experienced vacancies–but not any more.
2. Start marketing your rental units early.
Start marketing your rental units 45 to 60 days before they go vacant–something that most management companies don’t do because it requires additional management processes and time.
Two months before a lease expires contact the tenant to find out if they intend on renewing their lease. If they’ve been a good tenant, tell them you’d like them to stay. Tenants appreciate landlords and property managers who appreciate them. If the tenants indicates they won’t be renewing the lease, still tell them how much you appreciated them as a tenant–even if they haven’t been the greatest tenant. You want them on your side during this time of transition. A disgruntled tenant can make it very difficult to re-rent a unit.
If you’re able to start showing the unit before the current tenants move out, all the better. But in order to do this you’ll need permission from the tenant. If tenants feel like they’ve been treated fairly, most will allow you to start showing the unit to prospective tenants before they’ve moved out. Sometimes you can even offer a financial incentive to current tenants to show the unit for you.
If you’re not able to get prospective tenants in to walk through a unit before it goes vacant, then make sure to have top notch virtual videos for your property that can be viewed online.
If you start marketing your units early, your vacancy rate will go way down.
3. Implement virtual online property tours.
We live in a day and age of digital communication technology. Using digital technology–specifically virtual tours–to show and market your rental property will decrease vacancy rates dramatically. You should create a virtual tour for each and every one of your rental units that prospective tenants can view online via a desktop computer or mobile device. If you’re not already using virtual tours, you’re loosing out–and your vacancy rate will climb.
Most people–millennials in particular–are very comfortable with making a rental decision based on a virtual online tour. When developing virtual tours, you want to include the interior and exterior of each unit, as well as the neighborhood. People care about location. If your virtual tours are just showing the inside of the unit, you’re not giving prospective tenants enough information to make a purchasing decision. We don’t just living in buildings, we live in communities. So make sure your virtual tour shows prospective tenants the community they’ll be joining if they decide to rent your unit.
When developing a virtual tour for your rental property, be accurate and honest. If you create virtual tours that are compelling, yet accurate, you’ll attract good tenants who remain happy tenants.
4. Create a safe environment.
Believe it or not, safety is one of the most important concerns you can address to decrease vacancy rate. If prospective tenants feel safe in your property, they’ll sign a lease. If current tenants feel safe, they’ll renew their lease. When tenants don’t feel safe, they’ll find an excuse to move out. The following are steps you can take to create a safe environment for your rental property.
- Put up a fence (especially if your rental property isn’t in the best part of town)
- Landscape your rental property
- Implement–and enforce–safety rules for all tenants (i.e. parking, trash, no smoking, etc.)
- Conduct safety inspections regularly
- Keep the premises clean
- Add a security system
Create a safe environment for your tenants and you’ll lower your vacancy rate.
5. Get to know your tenants.
I’ve heard landlords and property managers advise keeping an arms length relationship with your tenants. They’re absolutely wrong. Take the time to learn more about your tenants, get to know them and you’ll make them feel at home. You don’t need to take your tenants out to dinner or get overly friendly–but by all means say hello and be friendly. It’s a lot harder to leave a friend’s house than to leave a rental dwelling operated by someone you don’t know or like.
Get to know your tenants and your vacancy rate will go down–and you’re tenants will take better care of your rental property.
(Note: Be very careful about being too friendly with prospective tenants and applicants. An innocent question, such as “Are you married?” or “How big is your family?” could be construed as discrimination under the Fair Housing Act and land you in legal hot water.)
The first rental property I ever purchased was built in 1975. It had a traditional brick exterior, was located in an older area of town, was overgrown with hardy–yet ugly–juniper shrubs, and half the units were vacant. The landscaping was as old as the rental–and it made everything look dated and unkempt.
The first thing I did was take my 2500 Chevy Silverado truck (and a thick chain) and pull out every single juniper shrub. I also removed two overgrown rose bushes, several shade trees that were getting leaves and seeds on everything, put inexpensive stone planters around the foundation, and replaced all the trees and shrubs with beautiful little seedlings.
In all, it took me about two days and $500 to completely relandscape the premise. It looked brand new, fresh, and clean. My 1975’s rental now looked twenty years newer–and pristine. Within a week, I was able to fill the vacant units with new tenants.
Landscaping makes a difference. Want to decrease your vacancy rate? Use simple, yet attractive landscaping.
7. Keep your rents competitive.
Keeping your rents competitive not only means not charging too much–it also means not charging too little. If you’re tenants are never staying past the end of their lease, you may be charging too much for rent. Research local rent prices and find out what your competitors are charging to see if you’re offering your tenants a fair deal.
When rent prices in your market go up, raise your rents accordingly. Incremental increases in rental prices are much easier to swallow than giant increases in rents every couple years. Raising rents more than 10% at a time will cause tenants to move out–and increase your vacancy rate. But raising rents too frequently will do the same.
8. Keep your rental propery in good repair and up-to-date.
You don’t need to remodel your rental every year, but you do need to make sure it’s always in good repair. If a tenant submits a repair ticket, make sure the repair is addresses in a timely manner. The best course of action is to contact the tenant as soon as a repair ticket is submitted, discuss the repair and then set a date to have the repair completed. This way the tenant doesn’t feel like they’re being ignored and you buy yourself a few days to get the repair done.
One of the most common reasons for vacancy is infrequent or nonexistent repairs. If you want to keep your rental property filled with good tenants, you must make timely and necessary repairs and keep your rental units in top operating condition.
In addition to timely repairs, you also need to keep your rental property up-to-date. If you’re going to invest in remodeling, invest where it’s going to make the most difference. Focus on the kitchen. Things most tenants are looking for include:
- Garbage disposal
- New stainless steel appliances
- Storage space
- Natural light
- Butcher-block countertop
- Attractive backsplashes
Consider investing in smart home amenities–even if your rental property is older. People like living in a modern space. That doesn’t mean you need to redo the flooring or resurface the ceilings. Invest in practical items like smart thermostats, smoke detectors, new door locks or a security system.
If nothing more, make sure your rental has clean walls and a fresh coat of paint.
9. Offer incentives.
I don’t like offering incentives, but I have done so from time to time when the rental market is really tight. Offering a current or prospective tenant a small incentive is much better than having a vacancy that could cost you several months in lost rent.
For example, you can offer a prospective tenant a discount off their first months rent or a free gift–such as a household appliance–if they sign a lease by the end of the month. For current tenants, you may offer a reduction in one month’s rent or paid utilities, if they renew their lease.
10. Reward existing tenants.
There are many ways to reward existing tenants and keep them happy. The best way is to not raise their rent. However, you need to be careful. This can be a double edged sword. Although you will need to increase rent over time, try to avoid this for as long as you can. And never raise a tenant’s rent more than 10% at time, if you can help it.
For existing tenants, I’ll usually keep their rent at about 5% below market. If two bedroom units are renting for $800 a month, I may keep an existing tenant’s rent at $760 a month.
The Take Away
Vacancies do occur, but don’t believe for a minute they’re a natural, inevitable part of owning a rental property. I went for 6 years without one vacancy in my 22 units. How? By simply implementing the ten steps above.